LONDON (Reuters) – Financial markets have been shaken this quarter by a raft of worries: the prospect of a global trade war, turmoil in the Trump Administration, signals by central banks of a shift towards monetary tightening and tensions between world powers.
These factors have weighed on sentiment following a burst of market volatility in February that wiped trillions of dollars from world stocks from which investors are yet to recover fully.
Here are 10 charts to watch for warning signs of increasing market turmoil, stress in the banking system and investor flight to safety:
U.S. YIELD CURVE
The gap between 10-year US10YT=RR and 2-year US Treasury yields US2YT=RR. A ‘flattening’ curve is often considered a portent of slowing economic activity, an ‘inverted’ curve has been a reliable predictor of recession. The curve hit its flattest in a decade in January and has flattened further in recent days on demand for safe-haven, long-dated Treasuries.
The Japanese yen’s exchange rate against the U.S. dollar. In times of market stress or financial stress, the yen often strengthens, pushing dollar/yen lower. Earlier this month, dollar/yen hit its lowest level since November 2016. JPY=
The benchmark measure of U.S. stock market volatility, sometimes referred to as Wall Street’s “fear gauge”. Having posted its biggest one-day spike ever on February 5, the VIX .VIX has since come down but investors don’t see it revisiting the record lows of only a few months ago.
The gap between short-term U.S. interbank lending rates USD3MFSR= and overnight money market rates USD3MOIS=, reflecting perceived stress in the banking system and the corporate world. The gap widened to 52 basis points this week, a level not seen since January 2012. At the end of 2017, it was 27 basis points.
The gap between short-term interbank lending rates and comparable “risk-free” U.S. Treasury rates , reflecting perceived stress in the banking system and the corporate world. TED
An index of credit default swaps in the European financial sector, the cost of insuring against default on “junior” bank debt and effectively a measure of counterparty risk and stress in the banking system.
INVESTOR DEMAND FOR CASH
A measure of cash holdings in U.S. retail investors’ portfolios, according to the American Association of Individual Investors monthly asset allocation surveys. High cash balances reflect investors’ preference for safety over risk.
GLOBAL HIGH YIELD BONDS
Bank of America Merrill Lynch’s global index of high-yield bonds .MERHW00, reflecting credit risk in the so-called “junk” market, a sector that will attract huge inflows of cash in good times but often one of the first sectors investors will flee from in bad.
An index of sub-investment grade – or “junk” rated – European credit default swaps, effectively a measure of investors’ perception of credit risk and corporate borrowing costs.
ST. LOUIS FED FINANCIAL STRESS INDEX
The St. Louis Fed Financial Stress index aUSSTLFR measures the degree of financial stress in the markets. According to the St. Louis Fed, the average value of the index since its inception in 1993 is designed to be zero. Thus, zero is viewed as representing normal financial market conditions. Values below zero suggest below-average financial market stress, while values above zero suggest above-average financial market stress. Although still below zero, the index has risen considerably this year.